Expenses deductible over several years – borrowing, depreciation, capital works
The following expenses for your rental property may be deducted over a number of income years:
You can claim a deduction for borrowing expenses associated with purchasing your property, such as loan establishment fees, title search fees, and costs of preparing and filing mortgage documents. (Interest on the loan is not a borrowing expense, and can be claimed immediately).
If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan, whichever is less. If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.
You can deduct the decline in value for an income year of a depreciating asset (such as carpet, furniture and appliances in a rental property) that you held for any time during that year. The decline in value of a depreciating asset starts when you first use it, or install it ready for use. This is known as the depreciating asset's start time. For example, if you purchased an asset on 1 January and only use it for a taxable purpose, you can claim only half of the first year's decline in value.
Your deduction is reduced to the extent your use of the asset is for other than a taxable purpose.
For assets costing $300 or less, you can claim an immediate deduction for the entire cost (to the extent you use it for a taxable purpose). You can't do this if the asset is one of a set of assets that together cost more than $300 – for example, if you buy four dining chairs each costing $250, you can't treat them as separate assets to claim an immediate deduction.
To work out the decline in value of a depreciating asset, you need to know its effective life – that is, how many years you can use it for a taxable purpose. For most depreciating assets, you can work out the effective life yourself, or use an effective life determined by us.
To work out your deduction for depreciation, use either the:
- prime cost method – this means the value of the depreciating asset decreases uniformly over its effective life, or
- diminishing cost method – this means the decline in value each year is a constant proportion of the remaining value; so it diminishes over time.
To save on paperwork, depreciating assets valued at less than $1,000 can be grouped in a low-value asset pool and depreciated together.
You can work it out using the Decline in value calculator.
- Rental properties (includes list of deductible rental property assets and their effective life)
Capital works expenditure
Deductions for construction expenditure (capital works deductions) on residential rental properties are generally spread over a period of 25 or 40 years.
Your total capital works deductions can't exceed the construction expenditure. No deduction is available until construction is complete.
Deductions for construction expenditure apply to capital works such as:
- a building or an extension – for example, adding a room, garage, patio or pergola
- alterations – such as removing or adding an internal wall
- structural improvements – such as adding a gazebo, carport, sealed driveway, retaining wall or fence.
You can only claim deductions for the period during the year the property is rented or is available for rent.
If you have claimed, or could have claimed, a capital works deduction for construction expenditure:
- you can't claim the same amount as a deduction for decline in value of a depreciating asset, and
- the amount must be excluded from the cost base of the asset.
Borrowing expenses (not including interest, which can be deducted immediately), depreciation and capital works spending may be deducted over a number of years.